So, a guy walks into a gas station after filling his Prius with 40 liters of fuel and the person behind the till says, “That’ll be $40, sir. Next time, you might want to save yourself the trip in and pay at the pump.” The man hands over $51 and says, “I would love to, but the gas pump won’t collect my carbon tax payment. You see, we are in a climate crisis, and by adding a $100/ton carbon price to my gasoline purchase, I am saving the world. No more climate refugees, fewer earthquakes, fewer severe hurricanes. So please, just add the $11 to your tax remittance to Ottawa. Have a nice day.”

From a factual perspective, the guy in the gas station was correct. A $100/ton carbon tax would add about $11 to his 40l fill, assuming full cost pass-through of all upstream carbon charges. The energy content of gasoline is 35MJ/l, and the CO2 embedded in that gasoline is about 110gCO2/MJ, or 2.750kgCO2e/l of oil produced, refined, and burned as gasoline. There is also little dispute that a $100/ton carbon charge would allow Canada to meet its Copenhagen targets or that similar pricing applied worldwide would get us at least close to a 2 degree Celcius limit on climate change. What was incorrect was the leverage ratio that he applied to his carbon tax payment. You see, he simply assumed that, after taking this action on his own, others would follow. He compared the costs of his own actions with benefits which would come about with similar action by more than 30 million other Canadians and over 6 billion people worldwide. While that is possible, it seems unlikely. My example is intentionally absurd, but this type of leveraged benefits of domestic climate policy action is often present in the debate over what Canada and other countries should do. Similar leveraged discussion is also often present in the debate over the oilsands.

Australia finds itself today in a heated debate over climate policy. Australia is quite similar to Canada from an emissions perspective, so it makes sense to look at them as a parallel. In 2009, Australia generated 537 Mt of GHG emissions, most of that coming from the energy sector. Canada’s emissions are about 35% higher than Australia’s, but our population is also significantly higher. Our emissions dependence on energy is not quite as high given our hydro assets. Regardless, each of these countries represent less than 2% of global emissions.

Although Australia is small, we see a lot of leveraged values applied to their actions. For example, consider this op-ed by Professor Tim Flannery (author of The Weather Makers), Professor Will Steffen, and Gerry Hueston. The article begins with a discussion of the science of climate change, then opines that, “if (Australia) manages to achieve even a 5 per cent reduction (in GHGs below 2000 levels) by 2020, (emissions will be) 25 per cent less than (they otherwise) would have been. That is a big number.” Australia’s “big number” is likely to reduce global emissions by a whopping 0.2-0.3% in 2020. By any measure, these actions will be an immaterial contribution to reducing the risk of catastrophic climate change. However, Professor Flannery and co-authors go on to say that, “it is only by playing our part in reducing emissions that we can reduce both the risk of dangerous climate change and the risk that policy decisions taken by other economies will affect our economy and our terms of trade.” The op-ed is ironically titled Separating Myth From Fact. To suggest that the only way in which Australia can avoid any of these damages is through domestic action may not be a myth but it is certainly a strong hypothetical based on an absurd leverage ratio applied to domestic actions.

The leverage, at least in terms of the directly avoided GHG emissions, scales up the impact of Australia’s actions by a factor of about 100x by assuming a causal link between Australia’s actions and significant global emissions reductions. The reality is less clear. Global emissions are concentrated in 4 regions, the US, the EU, China, and India, which now comprise about 60% of global emissions, and that share is growing quickly. Significant action from these jurisdictions will be needed to make any meaningful changes in our global emissions trajectory and we deny this at our peril. It seems a stretch to suggest that the domestic action in Australia will have a much more meaningful impact on global emissions, at least proportionally, than will the actions of the hypothetical man in the gas station.

The second part of the warning is worth heeding. By not taking action which is deemed to be a sufficient contribution to a global effort, Australia may be exposing itself to trade sanctions and other actions which would impose costs on the economy greater than the costs of the climate policy itself. As the world leans on the large emitters to impose costs on their producers, they will be loathe to see those emissions and the attached jobs fleeing elsewhere. In fact. this is where the leverage ratio should be applied since there are those who would seek to use the urgency of the climate crisis to advance other protectionist agendas through environmental trade barriers and border tax adjustments. Whether or not you believe in climate change, you should be worried about those who would seek to leverage your inaction for their own benefit.

I mentioned oil sands and leverage, and I think it is worth a couple of words. I often hear people say that the growth in oil sands emissions, from perhaps 40Mt today to perhaps double that by 2020 will prevent Canada from reaching its goals under the Copenhagen pseudo-accord. That simply is not true. Canada’s goal is to reduce emissions to 607Mt by 2020. Yes, 607Mt. In fact, if you look here at this report by habitual oil sands cheerleaders the Pembina Institute and the David Suzuki Foundation, you will see the results of a carbon pricing policy in which oil sands production grows through 2020 (in fact more than doubles) while still allowing Canada to meet its Copenhagen targets. To suggest that oil sands production and emissions growth implies that we will not meet our target applies a leverage factor to oil sands emissions,effectively assuming that other sectors in the economy will have the same growth opportunities as the oil sands sector. That’s a stretch, but one I guess many jurisdictions would welcome.

So, the next time you are presented with a discussion on the costs and benefits of a particular climate policy, think about leverage. Ask yourself what factor is being applied to the benefits or the costs of the actions proposed (you may have a good idea where to look based on the author or the text your are reading) and I hope you challenge yourself to think about what the real risk weighting should be. I am very much in favour of strong GHG emissions policy in Canada, but I am not sufficiently ignorant of the science to believe that our actions will have any meaningful direct impact on the storms my grandchildren see (pun intended), but there are plenty of other good reasons to act which should get more attention in the discussion of GHG policy in Alberta, Canada, and Australia.

14 responses to “So, a guy walks into a gas station…”

Surely you’re not suggesting that the real reason the Australian government is attempting to introduce a carbon tax is out of fear, not fear of future climate catastrophe as they preach publically, but fear of trade repercussions? I remember Stephan Dione tried to sell that reason to the Canadian public during the election and he lost his job. And rightly so, it made him look weak and subservient. The Australian government knows the result of the Canadian green-shift election, and they know that excuse won’t fly. And now you say that a carbon tax won’t have any significant effect on climate. So if both reasons they give are lame, what is the real reason they want this tax?

I am not suggesting anything about what their motivations are, but I am suggesting that they should worry more about trade impacts than about the leverage their actions will have on global climate change. Dion talked about that issue but never nailed it. If you don’t think it is a worry for Canada, look at the Alberta Royalty Regime and a clause that states that environmental fees and charges paid for compliance reasons are royalty (and equivalently tax) deductible. That means that a border tax adjustment, as was proposed in the now defunct US legislation HR 2454, would be paid for mostly by foregone Canadian tax revenue. Look at action in the EU and in many US states and the amount of your money that our governments are now spending to counter these actions. Not saying we would have been better off with the Green Shift, but the costs of trying to defend against trade actions, or the costs of those actions themselves will mount over time.

Re: the Green Shift, I think Dion lost the carbon tax battle in part because he couldn’t get off the sound bite that it was win-win-win-win. Everyone knows that some people will lose from a carbon tax, and that some industries will suffer. When Dion was telling people everyone was going to win, and the CPC were telling people they were all going to lose, Dion could not win that fight. Plenty of other reasons why he lost it, but that one was key.

If Canada does not hit it’s 607Mt by 2020, what happens then? The EU will give us a good glaring, that’s about it. Perhaps they might erect some trade barriers, oh no, we might have to sell our wheat and coal to someone else. I don’t know, China might buy it.

I guess I don’t understand why you would still be “very much in favour of strong GHG emissions policy in Canada”. If it will have no significant impact on climate and there are no repercussions of any real consequence, what other reasons do you have to want this strong GHG policy?

The business case will vary depending on the sector. It is true that our ability to export to China could mitigate many of our problems, but the reality is that the economic costs of climate policy in Canada would in many cases be lower than the added costs of building new shipping infrastructure and incurring transportation costs, especially in markets which are otherwise global. We are heavily leveraged to the US as an importer of our products, and diversifying away from them will be very difficult and expensive. While we do have an existing trade agreement (NAFTA) with the US, the existence of the environmental side agreement makes GHG policy a key risk area. If you watched the development of GHG policy in the US, many were initially supportive of it because of the border adjustments which would re-balance the playing field vs. China – lots written on environmental trade barriers. The momentum for GHG policy in the US has really subsided, but they are only a softwood lumber dispute and a couple of big hurricanes away from being right back at it.

So, oil sands as an example. A $30/ton carbon price likely imposes very small net costs on the country, although it could conceivably generate large wealth transfers. Building new infrastructure west to avoid it imposes much larger costs, but would make business sense in a world with trade tariffs (some of it makes sense now). If you didn’t read my previous post on credible GHG policy and the oilsands, check it out. As owners of the resource, we are better off with a nearby market, since you price to delivery point and so we would bear some of the transportation costs overseas in our rents, taxes, etc.

The other area in which it makes business sense is in terms of the domestic social license to operate the oil sands and other key industries. If you look at survey data from CAPP or from Cambridge Strategies, the Canadian public is really not behind the oil sands industry, and this is fed by the environmental stories relating to water and GHGs. ENGOs know that Canadians are sensitive to international reputation, and will eventually be successful in convincing us to partially cut off our nose to spite our collective faces by putting significant constraints on the oil sands industry. Then, look at the Canadian electoral map and see where the most seats are compared to a map of resources. A broad-based GHG policy puts the discussion back where it should be which is on the value generated by each sector in our economy. In this case, broad GHG policy is a risk hedge against targeted, poorly designed GHG policy driven by a political agenda.

For us, GHG policy is a risk-hedge against domestic political economy and foreign policy, plain and simple.

Excellent post Andrew. This post really highlights the issues that people on both sides of the debate over implementing GHG policies often conveniently ignore. With respect to trade barriers, etc., the benefits certainly increase if the US and China move to regulate emissions (as the US is probably doing). What are the implications of Canada’s planned GHG regulatory approach if Parliament dissolves and the funding in the current budget is not passed? Does nothing happen until after an election on this front then?

And about Dion, I felt that he sufficiently explained the Green Shift to an audience with a policy background like you and me, Andrew, but hell if my father-in-law could make sense of it and he can usually get policy stuff pretty quickly despite having no background in it just common sense. I think you are right that if you describe something as win-win-win then anyone with any common sense will raise an eyebrow. This was a long time ago now, but I recall that Martha Hall-Findley explained the Green Shift in much simpler terms and greater clarity than Stephan Dion ever did. I especially remember her debating Peter Van Loan on The Agenda with Steve Paiken, and she made a thoroughly convincing and easy to understand case for the Green Shift.

Andrew, your points are well taken, but I want to say more about the leverage we could hope for with our eleven bucks, and why we should accept long odds.

Let’s stick with your driver.

Say he accepts that the consequences of the current path of carbon emissions will be devastating. (A surprisingly broad swathe of leaders occasionally talk this talk, however much they walk the walk.)

Say he also accepts that his own actions, alone, will have a negligible effect, except perhaps through the force of example, moral leadership, etc.

I think the balance tilts in favour of his gambling that the force of example and moral leadership will have broader effects — and of putting all his effort into maximizing this force.

Yeah, the odds are pretty lousy that the US, the EU, China, and India will restrain emissions sufficiently to avoid hideous consequences for the planet. But let’s at least go down fighting, and be able to say that we did everything possible in Alberta and Canada to be global leaders in this struggle. That justifies our eleven bucks, quite apart from trade advantages.

We don’t know how much leverage our climate leadership could have, if we took it on in a consistent, principled and committed way, and joined forces with other jurisdictions willing to do so.

(We also could talk about where the driver’s likely to spend his eleven bucks if it doesn’t go to his against-the-odds climate campaign — helping the homeless guy outside the station? Or on Doritos? This seems relevant to the moral equation, not to mention to a cost/benefit analysis.)

I think you hit the nail on the head at the end which is the question of how to integrate these issues into a cost-benefit analysis. Obviously, the pure benefit-cost analysis would show that the individual’s actions or those of a small emitter are pointless in the context of climate change, while the inverse analysis of the “climate crisis” with the leverage of a world’s worth of damages avoided may be used to justify any action. If it’s worth $11/fill, then it surely also must be worth $20, $100, $500, etc. So, you can use leveraged benefits to justify any action you want, from doing almost nothing to actions which are almost infinitely costly.

Part of why I was motivated to write this post is what I see as the “climate crisis” trump card. Climate policy should not be immune to critique because we are in a crisis – in fact, in a world where we believe that we are being given too few resources with which to sufficiently stem global emissions, we should ask the really hard questions about policies. Is the FiT in Ontario the best way to spend billions of dollars? Should we be spending $2 billion on CCS while many emissions reduction opportunities are left un-realized under the $15/ton SGER price? Any policy is not good policy just because we are in a crisis.

So, back to your comments. I guess the question I would put back to you is “how much do we do?” It’s easy to say we should do more than we are currently doing, but where do you stop. How would you operationalize your view of actions which enable moral leadership. Personally, I think we should match those in a position to lead on emissions price and throw the ball back to the EU. You lead, we’ll follow.

This is the crux of the climate problem – reducing GHG emissions amounts to providing a global public good, and we all tend to prefer to free-ride on the efforts of others for this type of good. In the end, very little gets done; at least according to most economics texts.

But our conventional understanding of public provision of public goods/commons management has been changing for some time, especially because of the work of Elinor Ostrom and colleagues (as well as many others). While her work has focused on fisheries and irrigation management in closed communities, I wonder if some of the same principles might apply in a global context? In particular, I wonder if the `solution’ to the climate problem might emerge gradually from a slow build-up of reciprocal actions to reduce emissions, rather than in some grand-daddy climate treaty agreed to by countries that make up most of the world’s carbon emissions? If so, then seemingly small actions – like Australia’s mooted cap and trade system – might in fact be a catalyst for action in other countries. After all, it certainly seems plausible to me that Europe’s ETS – which on it’s own will do little to affect global temperature – likely has played a role in shaping discussions in Europe. And it seems plausible that if Australia AND Europe have a climate policy, that pressure within Canada will increase in this dimension.

Although `rational countries’ might not think this way, this is the general feature of the cooperation that has emerged in many of the commons management challenges that Ostrom has studied. So although your carbon-tax paying driver is unlikely to shift others’ behaviour, perhaps highly visible actions like adoption of a national carbon policy could shift other countries’ behaviour. Given the dim prospects for a global treaty, it’s a nice hope anyway 🙂

Yes it would be nice if a common-management system could develop on a country-by-country basis to control the open-access nature of emitting GHG into the atmosphere. However, managing a common-management system through social and cultural traditions and rules is a completely different beast than the extremely complicated problem of an intergenerational externality with multiple nation states at varying degrees of economic development. A major difference being that proper management of an open-access resource such as a fishery will benefit everyone in the community at the current time as well as in the future since less effort needs to be exerted to bring in the same catch as under open access. Whereas, controlling climate change requires large sacrifices by people who will not survive to partake in the benefits. This is a major hurdle that climate policy needs to get past. Intergenerational bequest value can only get you so far, especially since we are also leaving future generations with levels of technology, physical capital, and human capital that will be much higher than when we were born.

Agreed. Intergenerational issues create all sorts of complexities (that was about 1/2 of my thesis a while back) and can really skew benefits of policies. In most inter-generational problems, you can square the equity transfers through sovereign debt, but this does not work with a global problem. I still think Nic is right that the hope for a global consensus agreement will be looked back on as our version of fiddling while Rome burns, but I might be mistaken.

Don’t know Ostrom’s work well, but it seems like it’s the co-operative vs. non-cooperative game issue that is in play. I really like your logic of a slow build-up of actions. I think what has been missing in Canada’s over-commit and under-deliver approach is any chance to pursue that type of strategy. Canada has been in a damned-if-you-do or damned-if-you-don’t world since 1997. I think you summarized my view of why our benchmarking to the EU price and encouraging them to re-assume the leadership role, but on verifiable price trade-offs, is the way to go. We can hope.

Good points – I agree. There’s at least two major dimensions to the climate problem – the spatial dimension (which Andrew’s post was about) and the temporal one (which you raise). We can’t address the problem without figuring out both of these. But progress on one brings us closer to the goal. On the local vs. global scales I agree with you as well. Analysis of successful commons management typically shows that shared culture, closed boundaries, homogenous populations, ability to sanction, trust, etc. are all good predictors of cooperation. My argument – and I’ll admit that it is probably fanciful – is that small steps like Australia’s possible cap and trade system could play a part in helping foster a global climate of trust that could just possibly lead to reciprocal actions by other countries. I’m not particularly optimistic, but as Andrew points out, there’s nothing to be particularly optimistic about in the global treaty arena either.

Thanks for clarifying. In your clarified argument, I do agree with you to an extent; there would be a potential for reciprocal action. I wrote another reply to you on Friday night but unfortunately pushed the wrong button on my blackberry and lost it.

I think what differs between us is our degree of optimism of how strong the incentive to reciprocate rather than “cash-in” would be. After thinking about it, you may be right with respect to small countries like Canada and Australia whose GHG policy would probably not have much of an effect on energy resource prices around the world individually. However, if one of the US or China adopted GHG policy, the incentive for the other NOT to control emissions may outweigh the reciprocity incentive due to the energy resource price effects. One of my PhD chapters focused on estimating these linkages globally. The extent to which global per capita emissions were linked was quite striking. I also found evidence that energy resource prices play a significant role in encouraging these emission linkages.
Thanks for the discussion!
Cheers,